Third party claimants are not permitted to enforce covenants under an insured’s policy in the absence of a judgment. A third party may not sue the insurer directly or join the insurer in the original action against the insured tortfeasor. [Spencer v. State Farm (1957) 152 Cal. App. 2d 797] No legal relationship exists between a plaintiff and an insurer of the defendant prior to plaintiff’s obtaining a judgment against the defendant. [Matthias v. United Pac. Ins. (1968) 260 Cal. App. 2d 752] See § D45 DIRECT ACTION AGAINST INSURANCE COMPANY [§ D45:1].

(b) The insured assigns the right against the insurer for failure to defend the insured in a third party suit brought by the third party against the insured. [Samson v. Transamerica Ins (1981) 30 Cal. 3d 220, 240-241] See § A103 ASSIGNMENT OF RIGHTS [§ A103:01 In general]

(c) The third party creditor has an equitable lien on the insurance proceeds paid to the insured. [Davidson v. Welch (1969) 270 Cal. App. 2d 220, 237 (private contract between non-insurance parties; breach of agreement to purchase or maintain insurance)] See § F6.04 FAILURE TO PROCURE AGREED TO COVERAGE [§ F6.04:3].

OBSERVATION:Standing distinguished: An ‘equitable’ lien on insurance proceeds relates to proceeds paid to the insured. This is not the same as a claim to proceeds before they are paid. Accordingly an equitable lien does not give “standing” to the third party to resolve questions about the insured’s rights under the policy. A third party creditor is only a ‘potential judgment creditor’ or ‘potential beneficiary under the policy’ and thus is not a person ‘interested’ for purposes of standing in order to bring an action for declaratory relief. [Otay Land v. Royal Indemnity (2008) 169 Cal. App. 4th 556, 564. See § S77.03 STANDING TO SUE [§ S77.03:1].

Insurable interest

Every interest in property, or any relation thereto, or liability in respect thereof … that might directly injure or damage the insured, is an insurable interest. [Insurance Code § 281] An example is a binding contract to assume the insured’s obligations under a lease is an insurable interest. [California Food v. Great American Ins. (1982) 130 Cal. App. 3d 892] See § I41 INSURABLE INTEREST [§ I41:1 In general]. This interest generally involves a claim against proceeds that are to be paid by the insurer to the insured.

What if the insurer denies coverage; can the third party contest an insurer’s denial of coverage?

An injured third party; nonparty, is not bound by a lawsuit between the insurer and the insured since the third party is not a party to the litigation. [Shapiro v. Republic Indem. (1959) 32 Cal. 2d 437, 438-440; Old Republic Ins. v. Superior Court (1998) 66 Cal. App. 4th 128, 151 (‘ … the party against whom preclusion is sought must be the same or as in privity with the party to the prior litigation’)] The same rule applies involving parties to the “same action”. [Old Republic v. Superior Court (1998) 66 Cal. App. 4th 128, 151 (non-party insurer not collaterally estopped). See § C39 COLLATERAL ESTOPPEL [§ C39:4.1, § C39:6, § C39:7]

Remedy: Intervention by third party in suit

A judgment in favor of an insurer against an insured policyholder declaring there is no coverage to the insured should not prevent an injured third party from proceeding on its own behalf. [Winchester Fire Ins. v. Mendez (2009, 9th Cir) 585 F.3d 1183, 1189 (intervention by third party into suit between insurer and insured)]

Remedy: Declaratory relief

The U.S. Supreme Court has held that an ‘actual controversy’ can exist between an insurer and the allegedly injured party even though the injured party is not a party to the insurance contract. [Maryland Cas. v. Pacific Coal (1941) 312 U.S. 270, 273-274, cited with approval in Westchester Fire Ins. v. Mendez (2009) 585 F.3d 1183, 1189; Davidson v. Welch (1969) 270 Cal. App. 2d 220 (private contract between non-insurance parties; breach of agreement to procure insurance)] See discussion § D9 DECLARATORY RELIEF [§ D9:9.1 “Any person interested …”; standing of third party prior to judgment against insured]; § F6 FAILURE TO PROCURE AGREED UPON COVERAGE [§ F6.04:3].

References in bold are to Mr. Cornblum’s text CALIFORNIA INSURANCE LAW DICTIONARY AND DESK REFERENCE, 2019 Edition, published by ThomsonReuters (1-800-344-5008) to order 3-Volume text). This text also available to search on Westlaw.